Understanding NBFCs: Complete Guide to Non-Banking Financial Company Regulations and Depositor Safety Measures
The Reserve Bank of India has released comprehensive clarifications (updated February 10, 2026) addressing various aspects of Non-Banking Financial Company operations, regulatory requirements, and depositor protection mechanisms. This detailed framework provides essential information for stakeholders seeking to understand the NBFC ecosystem in India.
Fundamental Concepts and Definitions
Understanding Non-Banking Financial Companies
An NBFC represents a corporate entity registered under either the Companies Act, 1956 or Companies Act, 2013, that conducts financial operations including lending, purchasing securities such as shares, bonds, debentures issued by governmental or local authorities, and engaging in leasing or hire-purchase activities as its core operations. However, entities primarily involved in agricultural operations, industrial manufacturing, trading goods (excluding securities), service provision, or real estate transactions fall outside this definition.
The Principal Business Test
The determination of whether a corporate entity qualifies as an NBFC relies on what is commonly termed the "50-50 test." This evaluation requires that financial assets comprise over 50 percent of total assets (after excluding intangible assets) while simultaneously, income generated from such financial assets exceeds 50 percent of gross income. Only companies satisfying both conditions must register with the Reserve Bank.
The Reserve Bank of India Act, 1934 does not explicitly define "principal business." Therefore, the Reserve Bank introduced this criterion through Press Release 1998-99/1269 dated April 08, 1999, ensuring that only companies predominantly conducting financial activities come under its regulatory supervision. Consequently, companies whose main activities involve agricultural work, industrial production, merchandise trading, service delivery, or property dealings, while conducting minor financial operations, remain outside Reserve Bank oversight.
Distinguishing NBFCs from Banking Institutions
Though NBFCs perform functions resembling banking operations through lending and investment activities, fundamental differences exist:
Key Distinctions:
- NBFCs lack authority to accept demand deposits from customers
- These entities operate outside the payment and settlement infrastructure and cannot issue cheques
- Depositors with NBFCs do not receive protection from the Deposit Insurance and Credit Guarantee Corporation (DICGC)
Registration Framework and Requirements
Mandatory Registration Provisions
According to Section 45-IA of the RBI Act, 1934, no corporate entity may commence NBFC operations without securing a registration certificate from the Reserve Bank. The minimum Net Owned Fund (NOF) requirement stands at ₹10 crore effective October 01, 2022. New applicants must possess this minimum NOF from inception, while existing NBFCs have until March 31, 2027 to achieve this threshold.
Notably, the Reserve Bank does not regulate all financial companies. Depending on operational nature, certain financial entities fall under alternative regulatory frameworks administered by SEBI, IRDAI, or Government authorities.
Exempted Categories
To prevent regulatory duplication, specific NBFC categories regulated by other authorities receive exemption from Reserve Bank registration requirements:
- Alternative Investment Funds and Merchant Banking entities under SEBI registration
- Insurance Companies holding valid IRDA certificates
- Nidhi companies notified under Companies Act, 1956 provisions
- Chit companies operating under the Chit Funds Act, 1982
- Stock Exchanges and Mutual Benefit companies
The 'Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Directions, 2025' specifies exempted categories from various RBI Act, 1934 provisions.
Registration Prerequisites
Companies intending to commence non-banking financial operations as defined under Section 45I(a) of the RBI Act, 1934 must fulfill these conditions:
Mandatory Requirements:
- Incorporation under Section 3 of the Companies Act, 1956 or corresponding Companies Act, 2013 provisions
- Minimum net owned fund of ₹10 crore (specialized NBFCs face higher thresholds: NBFC-Infrastructure Finance Company requires ₹300 crore; Infrastructure Debt Fund – NBFC needs ₹300 crore; Mortgage Guarantee Company demands ₹100 crore; Housing Finance Company requires ₹20 crore; Standalone Primary Dealers undertaking core activities need ₹150 crore, while those with non-core activities require ₹250 crore; NBFC-AA and NBFC-P2P each need ₹2 crore)
- Application submission through the Reserve Bank's PRAVAAH portal with prescribed documentation per Press Release 2015-2016/2935 dated June 17, 2016
Classification and Categorization Framework
Regulatory Structure Categories
NBFCs undergo classification based on multiple parameters:
By Liability Type:
- Deposit-accepting NBFCs
- Non-deposit accepting NBFCs
By Regulatory Scale:
The Scale Based Regulation framework creates four tiers:
- NBFC-Base Layer
- NBFC-Middle Layer
- NBFC-Upper Layer
- NBFC-Top Layer
Details appear in the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Directions, 2025.
Activity-Based Classifications
Investment and Credit Company (ICC)
An ICC operates as a financial institution whose principal business involves asset financing, providing funds through loans or advances for activities beyond its own operations, and acquiring securities. This category excludes other specifically defined NBFC types.
Housing Finance Company (HFC)
An HFC must satisfy these conditions:
- At least 60% of total assets (net of intangible assets) deployed toward housing finance as defined in paragraph 10(8) of the Reserve Bank of India (Housing Finance Companies) Directions, 2025
- Minimum 50% of total assets (net of intangible assets) allocated to housing finance for individuals per clauses (i) to (v) of Paragraph 10(8) of said Directions
Infrastructure Finance Company (IFC)
An IFC deploys at least 75 percent of total assets toward infrastructure lending activities.
Infrastructure Debt Fund (IDF-NBFC)
This non-deposit taking NBFC receives permission to:
- Refinance infrastructure projects post-commencement operations date (COD) after completing one year of satisfactory commercial operations
- Finance toll operate transfer (TOT) projects as direct lender
Core Investment Company (CIC)
A CIC conducts share and securities acquisition business while satisfying these conditions:
- Holds minimum 90% of net assets as investments in equity shares, preference shares, debt or loans in group companies
- Investments in group company equity shares (including instruments mandatorily convertible to equity within 10 years) and Infrastructure Investment Trust (InvIT) units as sponsor constitute at least 60% of net assets
- CIC exposure toward InvITs limited to sponsor holdings, not exceeding minimum units and tenor prescribed under SEBI (Infrastructure Investment Trusts) Regulations, 2014
- Refrains from trading investments in group company shares, debt or loans except through block sales for dilution or disinvestment purposes
- Conducts no other financial activities referenced in Section 45I(c) and 45I(f) of the RBI Act, 1934 except: bank deposits, money market instruments, government securities, group company bonds/debentures; group company loans; and group company guarantees
- Maintains asset size of ₹100 crore or above
- Accepts public funds
Micro Finance Institution (NBFC-MFI)
An NBFC-MFI represents a non-deposit taking NBFC deploying minimum 75 percent of total assets toward "microfinance loans" as defined under Reserve Bank of India (Non-Banking Financial Companies – Credit Facilities) Directions, 2025:
Microfinance Loan Characteristics:
- Collateral-free lending to households with annual income up to ₹3,00,000
- Household defined as individual family unit (husband, wife, unmarried children)
- All collateral-free loans to low-income households (annual income up to ₹3,00,000) qualify regardless of end use or application/processing/disbursal mode (physical or digital)
- No linkage with lien on borrower's deposit account to ensure collateral-free nature
- Board-approved policy providing flexible repayment periodicity matching borrower requirements
Non-Banking Financial Company – Factors (NBFC-Factors)
This non-deposit taking NBFC engages principally in factoring business, with factoring financial assets comprising at least 50 percent of total assets and factoring income representing minimum 50 percent of gross income.
Mortgage Guarantee Companies (MGC)
An MGC primarily transacts mortgage guarantee business, providing guarantees for outstanding housing loan repayment and accrued interest up to guaranteed amounts to creditor institutions upon trigger events. Primary transaction status requires either 90 percent of business turnover or 90% of gross income originating from mortgage guarantee operations.
Standalone Primary Dealers (SPDs)
SPDs function as NBFCs authorized to undertake Primary Dealer activities in Government Securities. They perform defined core and non-core activities, supporting G-Sec markets (primary and secondary) through obligations including primary auction participation, G-Sec market making, predominant G-Sec investment, and minimum secondary market turnover ratio achievement.
Non-Operative Financial Holding Company (NOFHC)
Per Reserve Bank of India (Non-Operative Financial Holding Companies) Directions, 2025 (updated December 05, 2025), an NOFHC represents a non-deposit taking NBFC holding banking company shares and all group financial services company shares (whether Reserve Bank or other regulator supervised), to extents permissible under applicable regulatory prescriptions.
NBFC – Account Aggregator (NBFC-AA)
As notified under sub-clause (iii) of clause (f) of section 45-I of the RBI Act, an NBFC-AA undertakes account aggregator business for fees or otherwise. This business involves providing services under contract for:
- Retrieving or collecting customer financial information as Reserve Bank-specified
- Consolidating, organizing and presenting such information to customers or Reserve Bank-specified financial information users
Importantly, customer financial information does not constitute NBFC-AA property and cannot be utilized otherwise.